Dividing Retirement Assets in Divorce? You Need a QDRO

When you file for divorce, one of the main issues is the division of your marital property. For most people, retirement savings make up a significant portion of their assets. How do you divide these fairly – and why is a qualified domestic relations order (QDRO) needed?

First, be aware that in the large majority of cases, you will have to divide your retirement savings. This is because the account has usually been created, or you have contributed to it, during your marriage. This makes all or most of your retirement assets part of the community estate under Arizona law. Community assets are to be divided fairly.

If your retirement savings are in a 401(k), 403(b) or another qualifying account, it takes a special court order to divide them. Without this order (the QDRO), the account administrator would not have the power to turn over any of the assets to a person who is not the owner of the account.

You could simply withdraw half of the money and turn it over to your spouse, but that would be a very costly way to handle the division. Assuming you’re not at retirement age right now, you would be subject to stiff early-withdrawal penalties and would have to pay income taxes on the amount you withdrew.

A QDRO Can Bypass the Penalties and Taxes

What a QDRO does is instruct the plan administrator to pay a portion or a retirement account to an “alternate payee” than the plan participant. In most cases, this alternate payee is the divorcing spouse of the plan participant, but it could also be a child or other dependent.

As long as the money is transferred into an equivalent type of account, neither the plan participant nor the alternate payee owes any taxes or penalties. If the alternate payee does not have it transferred into another retirement account, they would end up owing taxes.

A QDRO should have instructions to handle the division slightly differently if a loan has been taken out against the retirement account. Also, there could be limitations if one of the spouses was divorced before and their retirement accounts are already subject to another QDRO.

The QDRO should spell out whether the alternate payee will receive a lump-sum payment or payment over time in installments.

How Do I Get a QDRO?

A good divorce attorney should know how to draft a QDRO that will work for you. Your divorce attorney can ensure the form will meet the plan administrator’s requirements ahead of time, and then include it in your proposed divorce decree for the judge to sign.